ITRA Global News

Tenant Tip: The Pitfalls of “As-Is” Lease Clauses

November 05, 2018

Tenants and buyers who acquire a property in “as is” condition put themselves at great risk. Even when the space looks fine and has been previously occupied, it’s quite possible that building and zoning codes have changed, or the infrastructure may be inadequate or may need to be repaired or replaced. The implications of leasing space in a multi-tenant building with a gross lease vs. in a building with triple net expense responsibility should also be considered.

While code compliance for occupying the property without making changes might be grandfathered, tenants must consider that renovations to the premises for the same use, or even a change of ownership, will most likely trigger code compliance issues. For example, fire suppression and fire alarm systems, emergency exits, ADA compliant restrooms and ADA access to the building might need to be modified or added. If interior demolition is required in an older building for a renovation, for a new layout or for new infrastructure, and then subsequently asbestos is discovered, it will need to be abated. Asbestos abatement may also be needed if there are roof repairs, replacement of, or additions to roof top equipment. Abatement of environmental hazards may also be required.

If the use of the premises changes and/or the occupancy load increases, then heating, ventilation, air conditioning, electrical, fire suppression and voice/data infrastructure systems may not be adequate. City zoning and codes may require, for example, a greater number of restrooms, parking spaces and adequate provision for bicycle parking. Electric car charging stations and other amenities may also be required. Change of use could also trigger requirements for additional water, sewer and power from city utilities, and data from service providers.

Suggestions:

Don’t assume and don’t rely only on landlord or seller information about the property.

Do adequate due diligence and engage professional support for inspections and evaluations including maintenance records. Review infrastructure condition with the building service technicians.

When purchasing, definitely do an Environmental Site Assessment Phase I.

If “as is” is a condition precedent, then at least include written assurances in the lease or purchase agreement about the infrastructure operating conditions and code compliance as of the lease commencement or closing date.

An infrastructure guarantee until a date certain, e.g. 90 to 180+ days, from lease commencement would be helpful to reduce risk, especially in a triple net lease.

In a triple net lease, understand the capital replacement clause and depreciation expenses of the replaced asset.

Latent defects should be excluded from tenant responsibilities.

If the landlord performs renovation, be sure that the lease commencement date and rent payments are contingent on receiving a certificate of occupancy, so as a tenant you’re not responsible for construction delays.

Contact your ITRA Global representative who can help you avoid “as is” provisions, and other risks of leasing or purchasing property - to protect your company and improve your bottom line.